# Why the timing is right to invest in the Japanese stock market

- Link: https://www.directorstalkinterviews.com/why-the-timing-is-right-to-invest-in-the-japanese-stock-market/4121171245
- Published: 2024-09-11T12:24:22+01:00
- Author: Amilia Stone

Japan’s equity markets have seen extreme turbulence lately, with the Nikkei experiencing
its worst one-day drop since 1987 in the first week of August. While market volatility
may continue in the near term, Nicholas Price, portfolio manager of the **[Fidelity Japan Trust plc](https://www.directorstalkinterviews.com/company/fidelity-japan-trust/fjv.l)**(
[LON:FJV](https://www.directorstalkinterviews.com/company/fidelity-japan-trust/fjv.l))
believes that fundamentals and valuations will return to the fore once the selloff
has run its course. As a multi-decade investor in Japan, he reflects on the recent
challenges facing investors and analyses how he believes the market environment 
is likely to evolve over the coming months. 

Japanese stocks corrected by more than 20% from their peak on July 11, with key 
indices suffering historic losses on August 5. There were several factors behind
this sharp downturn, namely rising concerns about a recession in the US, unexpected
hawkishness from Bank of Japan (BoJ) Governor Ueda and accelerating Yen strength
leading to an unwinding of the carry trade. 

**Volatile markets **

In the near term, markets are likely to remain volatile, though the absence of any
material shift in domestic fundamentals suggests that the Japanese market will remain
susceptible to concerns over the US. However, once the selling has run its course,
fundamentals and valuations will come back into focus. Indeed, the recent FY24 Q1
reporting season in Japan delivered positive results and record levels of share 
buybacks, and the current forward price-to-earnings ratio of 14x is below the recent
historical average. Moreover, we believe that Japan’s economic shift to moderate
inflation and its impact on spending and investment decisions by households and 
corporates, combined with steady progress in governance reforms, represent multi-
year structural trends that are supportive of Japanese stocks over the longer term.

**Brighter outlook for small and mid caps **

Excessive recession fears in the U.S. and short-term adjustments in positions in
response to the BoJ’s interest rate hike have led to a rapid appreciation of the
Yen and a sharp decline in stock prices. However, we have not seen a material change
in corporate fundamentals and I believe that this is a short-term unwinding of positions
that has gone too far. 

As the Fed moves closer to interest rate cuts in the US, the outlook for Japanese
mid/small caps should start to improve. From a valuation perspective, Japanese mid-
caps are trading at a steep price-to-book discount to larger cap indices and have
lost all the price-earnings premium that was a constant feature of the past decade
or so.  

Some semiconductor-related and mid/small-cap growth stocks have become oversold,
and I have been selectively buying at the margin, while reconfirming fundamentals
with our analysts. The likelihood of additional rate hikes by the BoJ has diminished,
so I have slightly reduced positions in bank stocks. 

The more hawkish BoJ stance that accompanied the recent rate hike is also likely
to reinforce the change in trend on the currency toward Yen strength with the partial
reverse of the Yen carry trade. This may also benefit more domestically oriented
companies of which many are mid-caps, where the portfolio is overweight versus the
index. 

I am also encouraged by a broadening out of the Tokyo Stock Exchange  reforms and
expect to see a clear improvement in capital efficiency and shareholder returns (
a trend that was initially led by large-cap value companies) further down the market-
cap scale. 

At the same time, I am finding opportunities in typical large-cap sectors where 
companies are moving from value to growth, and signs of improvement in the global
manufacturing cycle are supportive of technology and factory automation stocks that
have struggled in recent years. 

The uncertainty in the market is allowing us to invest in strong growth companies
at very attractive valuations. Japan’s shift to moderate inflation, combined with
broadening corporate governance reforms, are supportive of the mid-to-long-term 
outlook for the Japanese stock market, where we remain positive on growth stocks.

_**Fidelity Japan Trust PLC** (LON:FJV) aims to be the key investment of choice 
for those seeking Japanese companies exposure. The Trust has a ‘growth at reasonable
price’ (GARP) investment style and approach – which involves identifying companies
whose growth prospects are being under-appreciated or are not fully recognised by
other investors. _

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